Student education loan lenders

The Federal Family Education Loan Program is a public private partnership created by the United State Congress in 1965 to deliver and administer guaranteed education loans for students and their parents. The program is the largest source of financial aid for higher education and has provided more than $ 416 billion in low cost loans to more than 50 million Americans during United Student Aid Funds 2005.


In 1976, the United State Congress authorized the creation of specialized student loan secondary market organizations throughout the country. They serve students and their parents by assuring education financing. They finance student loans in many ways. Most issue taxable bonds that are sold to investors on the international financial markets, meaning investors from around the world are financing Americans education.


Unlike private loans where rates and fees are determined by the borrowers credit history, federal loan options offer standard rates and fees to all eligible applicants. Private loan programs also do not offer the flexibility of federal loans, deferral, grace periods, and rebates for in-time payments.


The federal loan program provides two types of loans for post secondary education and training.

  • Subsidized loans for students with demonstrated financial need. The federal government pays the interest on these loans while the student attends university and during a six months grace period after graduation. Unsubsidized loans are available, but the student is responsible for all accrued interest.
  • Loans for parents. Parents can borrow up to the total cost of their childs education less other sources of financial aid grants, or work study.
  • If the student is approved for the federal loan program, lenders are willing to make a loan, despite the students lack of credit history, employment, or loan collateral because a state or nonprofit guaranty agency stands behind the loan. The federal government, in turn, partially reinsures the guarantee agency. Behind the scenes, the lender, the college, the guarantee agency, and the United States Department of Education work together to ensure the student is eligible and to prevent the borrower from defaulting.


    Secondary markets ensure the liquidity of the federal loan program by buying student loans from education lenders. This provides education lenders with more capital to originate more loans. As a result, secondary markets are among the largest holders of student loans. The largest secondary market in the United States is Sallie Mae, a private company founded as a government enterprise.


    The public private partnership of secondary markets, guarantee agencies, and lenders is one way the federal government effectively leverages billions of dollars in private capital to meet a specific public need. Historically, this type of partnership where the private and public sector share the risks has been more reliable and cost effective than centralized federal loan programs that rely exclusively on tax payer money.


    Student loans are difficult products for lenders. Few students have established credit ratings; there is no way to repossess a higher education; and few students can offer physical collateral Lenders are loath to become involved with borrowers without a credit rating or good collateral. Under the current system, federal loan guarantees overcome the reluctance of lenders. Although there is a clear need for loan guarantees, assigning this role to the federal government does not provide the proper incentives. Because it is more expensive, even with loan guarantees, to service a group of loans with a high default rate, lenders will have strong incentives to take a close look at institutions. Institutions clearly able to meet their loan guarantee commitments and institutions with good default rate histories will be able to attract more lenders and offer better interest rates to their students. Such a system provides the correct set of incentives. It rewards an institution for keeping its financial house in order and for providing a good education.


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